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SECz changes rules on nominee shares

The Securities Commission of Zimbabwe (SECz) has ordered stockbroking firms to register all shares under nominees in the names of the respective owners and to deliver them to the clients, in a bid to curb the incidence of scrip fraud.

Report by Staff Writer
A nominee account is one where an individual or organisation hold assets on behalf of a beneficiary. On the stock market, the most common use of nominee accounts is where execution-only brokers act as nominees for their clients. The shares are registered in the name of the broker, but the client has beneficial ownership.
An executing broker is a broker or dealer that finalises and processes an order on behalf of a client. The orders sent to executing brokers are assessed for appropriateness, and if deemed practical, the executing broker will carry them out. If the order is rejected, the customer is notified and the stock is not traded.
According to a letter from SECz, which was sent to all the stockbrokers and seen by businessdigest this week, stockbrokers were directed to stop trading their nominee accounts.
The move was necessitated by gross irregularities, which came out from on-site and off-site inspections carried out since 2009.
The commission also received several complaints from investors over the misuse of clients’ securities.
SECz stated that where the company faces any challenges in delivering scrip, the shares should be transferred to a licensed custodian within a timeframe and the commission should be advised accordingly.
Stockbroking firms are not allowed to hold shares for a period of more than 30 days after the expiry of the 60-day notice and those that want to do so should apply to the commission for custodian licences. In order to get a custodian licence, a stockbroker needs US$2 000 to register and a minimum capital of US$500 000.
SECz investigations show that there is poor record keeping in most firms with system-generated records conveying different information from what is on the ground. SECz also noted that some firms were holding securities worth between US$1 million and US$90 million. However, the indemnity cover for the firms is not proportionate with the risk associated with such portfolios.
SECz said there were also high incidents of fraud related to the securities held in custody. Stockbroking firms have fallen victim to fraud committed by employees who abuse the nominee accounts.
The letter also notes that some firms use clients’ shares to close open positions without the clients’ consent.
“The Commission has received complaints from clients who discovered that their Securities Dealers had transferred securities they own into their nominee companies without the clients’ knowledge and consent. In addition, some clients have not been able to access dividends because their securities were held by the securities dealers,” reads part of the letter.
Analysts say that while certificates were the traditional way of holding shares, pooled nominee accounts were now by far the most common. Stockbrokers preferred this because it cut costs and made the process more efficient. In addition, the fact that the stocks were recorded in their names meant that an investor would almost trade via them when he wanted to sell.
Most were agreed that the move was one of the first steps toward automation of the Zimbabwe Stock Exchange and the setting up of a central securities depository.

However having stocks recorded in the name of the investor at the central securities depository is uncommon in most countries and not possible or awkward in many. There are some exceptions, such as Singapore, where most local brokerage accounts require an investor to have his or her own account at the Central Depository, or the UK, where the process of having a personal account at CREST is simple, if rarely done by most investors.

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